On February 15, 2018 the Federal Energy Regulatory Commission issued a final rule directing regional transmission organizations and independent transmission system operators to revise their rules to facilitate the participation of “electric storage resources” in wholesale energy, capacity and ancillary services markets. The rule, which does not apply to utilities that are not members of an RTO or ISO, largely adopts proposals set down under the previous administration, ending over a year of speculation as to how a Republican-led FERC might address the same issues.[1] Although it will take approximately two years before RTO[2] actions to implement the final rule are in place, FERC’s order and rule represent a major step forward for energy storage resources that participate in organized wholesale electricity markets.

Under FERC’s rule, RTOs must revise their rules addressing how energy storage resources can participate in wholesale electric markets to (1) ensure that storage resources are eligible to provide all capacity, energy and ancillary services that they are technically capable of providing; (2) ensure that a storage resource participating in wholesale markets can be dispatched and can set the market clearing price as a seller and as a buyer of electric products; (3) account for the physical and operational characteristics of storage resources through bidding parameters or other means; and (4) establish a minimum size requirement of no more than 100 kilowatts for participation in RTO markets. RTOs must submit revisions to their wholesale market tariffs reflecting the revised participation model to FERC within 270 days from publication of the final rule in the Federal Register. RTOs will have another year to implement these market reforms.

Electric Storage Resources Defined

As an initial step, FERC is revising its regulations to define an electric storage resource as “a resource capable of receiving energy from the grid and storing it for later injection of electric energy back to the grid.” FERC states that this definition is intended to include all types of electric storage resources, regardless of their technology (e.g. batteries, flywheels, compressed air, and pumped-hydro) or whether they are located on the interstate transmission system or on a distribution system. Behind-the-meter installations can qualify as electric storage resources if they deliver power to the transmission grid. According to FERC, behind-the-meter resources that sell electricity to their host site or another retail consumer can already participate in wholesale markets as demand response resources.

Participation Models for Electric Storage Resources

In response to the final rule, RTOs must revise their rules for wholesale market participation – referred to as “participation models” – to facilitate the integration of storage resources while taking into account storage resources’ unique physical and operational characteristics. FERC did not prescribe specific market rules, leaving flexibility for RTOs to develop rules that best suit their individual market designs, but the resulting tariff revisions must satisfy certain minimum requirements. First, RTO tariffs must provide standard qualification criteria that an electric storage resource must satisfy to participate in wholesale markets. The qualification criteria must not limit participation to any particular technology, and must be based on the physical and operational characteristics of storage resources. Second, RTO tariffs must specify (1) whether qualifying storage resources will participate using existing or new market participation agreements, and (2) whether any particular existing market rules will apply to electric storage resources.

Under the final rule, as a condition of participating in any particular wholesale market, a storage resource must be technically capable of providing the applicable service, meaning that it must be able to “meet all of the technical, operational, and/or performance requirements that are necessary to reliably provide that service.” Unlike conventional generating technologies, which can generate as long as fuel or another energy input is available, electric storage resources have a finite run-time before they must recharge or otherwise refresh their stored energy, which can sometimes be extended if the resource does not discharge its full capacity all at once. Accordingly, FERC is directing RTOs to allow storage resources to de-rate their capacity to meet minimum run-time requirements. For example, an owner of a lithium ion battery installation that has a maximum storage capacity of 10 megawatts and can operate for four hours at full capacity might choose to de-rate the capacity of the resource to 5 megawatts and so be able to operate for eight hours. However, FERC cautions that storage resources must not de-rate the capacity of their resources below any capacity obligations that they have assumed. In addition, the ability to de-rate does not exempt a storage resource that is participating in RTO capacity markets from penalties for non-performance.

One of the key components of the final rule is that it requires RTOs to sell energy to storage resources at the applicable locational marginal price (LMP). This requirement means that storage resources that sell power in RTO markets are freed from having to pay the generally higher retail electric rates for energy to charge their storage resources. To avoid any potential arbitrage between zonal and nodal LMPs, FERC is directing RTOs to sell power to storage resources at the nodal LMP. In addition, the tariff revisions to be adopted by RTOs must ensure that a storage resource is capable of setting the LMP as seller or buyer. RTO tariffs must (1) permit storage resources to set the price in capacity auctions, where applicable, (2) require RTOs to accept bids from storage resources to buy energy, and (3) allow storage resources to participate in the RTO markets as price takers, meaning that they will accept the clearing price no matter how low or high. In order to benefit from these rules, storage resources must be capable of responding to dispatch instructions from the RTO.

Unlike traditional generation facilities, storage resources are capable of acting as both supply and demand, taking power from the grid when there is less demand and lower prices, and supplying power to the grid during periods of peak demand and higher prices. To reflect these operational capabilities, FERC directed RTOs to revise their tariffs to allow storage resources to participate in wholesale markets as both supply and demand resources by dispatching them in accordance with their most economically efficient use. However, since a storage resource could use a bidding strategy that results in conflicting dispatch signals from the RTO to buy and sell power during the same scheduling interval, it would be insufficient to rely on electric storage resources to resolve these conflicting dispatch signals. Accordingly, FERC is requiring RTOs to develop market rules that will prevent conflicting dispatch signals in the same market interval.

There may be circumstances in which an RTO could manually dispatch a storage device as demand when the price for energy is above the price of the resource’s bid to buy. Similarly, an RTO could dispatch a storage resource as supply when the price for energy is below the price of the resource’s bid to supply. Accordingly, the participation models developed in response to the final rule must include make-whole payments to compensate storage resources when they are dispatched uneconomically by the RTO.

Physical and Operating Characteristics of Electric Storage Resources

The dual nature of storage resources, as both supply and demand resources, combined with their unique physical and operational characteristics, requires bidding and participation strategies that differ from those relating to traditional generation facilities. In FERC’s view, participation models must account for these characteristics in order to enable storage resources to provide all of the services they are capable of providing. Accordingly, the participation models developed by each RTO must account for the following physical and operational characteristics of storage resources through bidding parameters or other means:

State of Charge. An electric storage resource’s state of charge represents the amount of energy stored in the resource as a percentage of the resource’s maximum storage capacity. Accordingly, a 6 megawatt battery that is charged only to 4.5 MW would have a state of charge of 75%.

Maximum/Minimum State of Charge. The maximum and minimum state of charge limits represent the maximum and minimum state of charge values that should not be exceeded when an storage resource participates in wholesale markets (e.g. Maximum State of Charge: 95%, Minimum State of Charge: 5%).

Maximum/Minimum Charge Limits. The maximum and minimum charge limits represent the maximum and minimum amounts of energy that a storage resource can receive from the grid, measured in megawatts. For example, a 10 MW battery with a 95% Maximum State of Charge that currently has a State of Charge of 20% would have a Maximum Charge Limit of 7.5 MW.

Maximum/Minimum Charge Time. The maximum and minimum charge times represent the maximum and minimum durations that an RTO can dispatch a storage resource to receive power from the grid.

Maximum/Minimum Run Time. The maximum and minimum run times represent the maximum and minimum durations that an RTO can dispatch a storage resource to inject power into the grid.

Maximum/Minimum Discharge Limits. The maximum and minimum discharge limits represent the maximum and minimum output levels (measured in megawatts) that an electric storage resource can inject into the grid. For example, a 10 MW battery with a 5% Minimum State of Charge that currently has a State of Charge of 80% would have a Maximum Discharge Limit of 7.5 MW.

Discharge/Charge Ramp Rates. The discharge and charge ramp rates represent the speed at which an electric storage resource can move from zero output to its maximum charge or discharge limits. For example, if a 20 MW battery with a Maximum Charge Limit of 19 MW requires two minutes to charge from 3 MW to 19 MW, then its charge ramp rate would be 8 MW per minute.

The final rule provides flexibility in how RTOs account for these characteristics. For example, RTOs can include requirements for storage resources to submit information regarding their physical and operational characteristics. However, RTOs must adopt flexible participation models that allow each storage resource to represent its physical and operational characteristics. In addition, RTOs and ISOs must acknowledge a storage resource’s commercial obligations in accounting for its physical and operational characteristics. Finally, FERC ruled that in order to optimize operation of electric storage resources to provide all of the wholesale services they are technical capable of providing, RTOs must allow storage resource operators to manage their own state of charge.

Conclusion

FERC’s final rule on participation of energy storage resources in wholesale electric markets represents significant advance for the storage industry. Although RTOs currently offer a range of participation opportunities for storage resources, the final rule will ensure that these resources can participate in every RTO market in which they are capable of providing service. Even though it may be approximately two years before the tariff changes required by the final rule are implemented, developers of energy storage resources should be encouraged by FERC’s action.

[1] The most significant departure from the proposed rule was the decision to postpone directing RTOs to revise their rules to facilitate participation of aggregated distributed energy resources, such as small solar installations, in wholesale markets. FERC will hold a technical conference in April to explore opportunities for participation of aggregated distributed energy resources in wholesale electric markets.

[2] “RTO” as used herein refers to FERC-approved regional transmission organizations and independent system operators.

Practice:

Adam Wenner heads Orrick's Energy Regulatory Group. He has been active in the energy industry for more than 35 years.

As Deputy Assistant General Counsel at the Federal Energy Regulatory Commission, Adam was instrumental in the development of the federal programs and policies that fostered the independent power industry, and his experience includes representing independent power generators -- including some of the largest wind and solar projects in the United States -- as well as merchant transmission companies, traditional electric utility companies, before FERC, state utility commissions and NERC Regional Reliability Organizations.

Adam also advises power project developers and financial institutions in transactions involving the development, financing, sale and purchase of energy projects, and he advises some of the largest U.S. companies in the development and implementation of FERC and NERC compliance programs.

Adam has authored many articles about the power industry in publications including Global Utilities Finance Report, International Power Finance Review, International Financial Law Review, Public Utilities Fortnightly, Electricity Journal and Energy Economist.

Practice:

Cory Lankford is an associate in Orrick’s Washington, D.C., office and is a member of the firm’s Energy and Infrastructure Group. His practice focuses on matters before the Federal Energy Regulatory Commission (FERC).

Before joining Orrick, Cory served as an attorney in the Office of the General Counsel at FERC, where he provided expert counsel on a variety of issues arising under the Federal Power Act, the Energy Policy Act of 2005, the Public Utility Holding Company Act of 2005, and the Energy Independence and Security Act of 2007. During his tenure in the Office of the General Counsel, Cory led numerous multidisciplinary teams in rulemaking proceedings establishing revisions to the pro forma Open Access Transmission Tariff and evaluating national and regional mandatory reliability standards proposed by the North American Electric Reliability Corporation.

Cory also was instrumental in the development and drafting of many Commission orders addressing Regional Transmission Organizations, compliance with open access requirements, transmission, interconnection and qualifying facility certification.

Among his accomplishments, Cory coordinated with staff at the U.S. Department of Energy to draft the National Action Plan on Demand Response and the corresponding Implementation Proposal to Congress. He also managed the development of a landmark order addressing the Commission’s jurisdiction over a non-jurisdictional transmission provider.

Cookies on our website

We use cookies on our website. If you continue to use our website, you are consenting to our use of cookies in accordance with our Cookie Policy. For information about how to change your cookie settings, please see our Cookie Policy.

Please read before sending e-mail.

Please do not include any confidential, secret or otherwise sensitive information concerning any potential or actual legal matter in this e-mail message. Unsolicited e-mails do not create an attorney-client relationship and confidential or secret information included in such e-mails cannot be protected from disclosure. Orrick does not have a duty or a legal obligation to keep confidential any information that you provide to us. Also, please note that our attorneys do not seek to practice law in any jurisdiction in which they are not properly authorized to do so.

By clicking "OK" below, you understand and agree that Orrick will have no duty to keep confidential any information you provide.